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Jewish World Review Jan. 25, 2000/18 Shevat, 5760

Lawrence Kudlow

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To preserve its standing as the world's number one economic power -- BILL CLINTON, Al Gore, Bill Bradley and John McCain keep blasting across-the-board tax cuts as a "risky tax scheme," but America's two leading economic rivals, Japan and Germany, have a better idea.

A year ago Japan ignored its budget deficit critics and lowered its top personal tax-rate to 50% from 65%, its corporate rate eased to 41% from 46%, while tax burdens on land sales, capital gains and financial transactions were also reduced. Almost immediately, the Japanese yen and the stock market took off like a rocket. After nearly ten years of recession, Japan's economy is now showing important recovery signs.

Just last week, Germany announced a similarly Reaganesque supply-side policy. With an economy bogged down by sub-par 2% growth, and a 10% unemployment rate, German Chancellor Gerhard Schroeder responded to the political embarrassment of five consecutive state election defeats with an abrupt economic policy u-turn that lowers the top personal rate to 45% from 53%, reduces the lowest personal tax-rate to 15% from 24%, drops the corporate rate to 25% from 40% (thereby putting it below the U.S. corporate rate of 35%, and eliminates the corporate capital gains tax.

As a result, economic incentives to work and invest will improve by 17% for individuals and 25% for businesses. Look for this to propel the German economy forward at a much faster growth rate. And it will be a capital formation and investment-led recovery, with no inflationary implications.

Meanwhile, large German companies will now find it profitable to make tax-free sales of their equity cross-holdings of other German firms, thereby reforming the interlocking corporatist system that for many decades has blocked entrepreneurs from gaining new capital for innovative and job-creating new business start-ups.

The U.S., for its part, had better not rest on its laurels. In 1999, foreign stock markets outperformed the U.S. Might foreign economic growth also soon outperform us?

Sizable pro-growth tax cuts in Germany and Japan could threaten an erosion of U.S. competitiveness, infer weakness in the King Dollar reign that has held down inflation, with a risk of financial outflows from the U.S. stock market. In the global race for capital, international investors seek the highest inflation-adjusted rate-of-return, after-tax. Market discipline is relentless, and the winning countries will be those with the lowest tax-rates and the steadiest currencies.

The U.S. is still the most deregulated economy, with flexible labor markets and capital markets' breadth, depth and resiliency that are the envy of the world. What's more, after the Y2K-linked technology investment spree, the U.S. will maintain its Internet economy lead for years.

However, to preserve its standing as the world's number one economic power, Washington policymakers should be taking additional steps to nurture 21st century technology advances, encourage entrepreneurship and expand the current prosperity rate. Instead of overspending, large budget surpluses should be converted into broad-based marginal tax-rate reduction, expanded 401(k) and IRA-type savings accounts and reform of Social Security through personal retirement accounts.

The spread of supply-side tax policies around the globe is a welcome event; stronger world growth is a positive-sum development that will raise living standards everywhere. But indefensible standpat Congressional inaction ignores another Reagan principle: the strongest possible economy at home is essential to our national security interests abroad.

JWR contributor Lawrence Kudlow is chief economist for Schroder & Co. Inc and CNBC. He is the author of American Abundance: The New Economic & Moral Prosperity. Send your comments about his column by clicking here.


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12/20/99: Dracula's Curve
12/16/99: When Alan Greenspan sneezes, Wall Street economists catch cold
12/10/99: Y2K-Related Cash
11/23/99: Y2K Money: Inflationary or Not?
11/16/99: Investor Retaliation
11/05/99: Rosy Lives
10/29/99: Drain Reserves
10/22/99: Supply-Side Is Mainstream
10/14/99: Y2K will likely bring more prosperity
10/07/99: Clinton's tax-cut veto
10/01/99: What's really bugging the stock market?
09/23/99: Growth Trade
09/09/99: Bad Dollar Logic
09/09/99: Buttered bread
08/31/99: Bull Market Alive and Well
08/26/99: Let Prices Rule
08/19/99: Blame OPEC, Not Growth

©1999, Lawrence Kudlow